Investment trick is to stay calm
Most investors are on edge. Many are close to panicking. Some unfortunate investors will receive margin calls.
As fellow investors, we understand the uncertainty you’re feeling. Like you, we don’t like to see our stocks and our portfolios plummet.
Today is a messy day. Some stocks will lose 5 per cent, 10 per cent, 20 per cent or even more in a single trading session. Expect the higher-risk, higher volatility stocks to be the worst hit.
It’s gut-wrenching, seat of the pants stuff.
The temptation is to sell. The news is not good (although it got a lot better by the day's end). The US economy is in a mess, its credit rating cut, and a double-dip recession looking a distinct possibility.
Europe is similarly struggling, with the huge debt-burdens in Italy and Spain weighing on investor’s minds. The London riots, threatening to spread to other parts of the United Kingdom, don’t help. The world, literally, is burning.
In an instant, selling stops the pain. In the face of stock markets crashing, cash is comforting. We can understand the attraction.
First and foremost, amidst the carnage, our advice to you is simple. Take a deep breath, stay calm, and keeps your emotions in check.
We know that restraint can be difficult, but successful investing requires it.
As a shareholder, you are a part-owner of a business. Over time, the value of great businesses will increase, likely substantially so.
The Motley Fool searches for the best companies and opportunities to create lasting wealth without racking up excessive trading costs and stress.
We're not market timers, nor do we have a crystal ball that tells us where stocks will go in the next month or year.
But we know that throughout history, stocks as a group have gone up two out of every three years, and we're confident that investing in stocks remains one of the best ways to create lasting wealth for you and your family.
Don’t sell now
With that in mind, we wouldn’t recommend selling stocks today. If you felt nervous, the time to sell was earlier this year, when the S&P/ASX 200 was trading at close to 5,000. It’s now around the 3,900 mark, a more than 20 per cent fall, a real fair-dinkum stock market crash.
Successful investors live for times like these, times when irrational sellers push stock prices down to compelling levels.
Jeremy Grantham, one of the most successful hedge fund managers, and one of the bearish, had this to say back in July 2009…
“After 20 years of more or less permanent overpricing of the S&P, we get five months of underpricing.
There is no justice in life! Well, at least not for the apparent handful of us who welcome the opportunity to invest at bargain prices! There is more happiness, it seems, for the armies of investors who prefer the temporary endorphin rush that comes with a rising market, even if it’s overpriced.”
Justice has returned, and probably quicker than Grantham could ever have expected. It’s not often you get two bites of the investing cherry in such a short period -- early 2009 and now August 2011.
We’re buying shares
Today, amidst the margin calls, the panic, and the fear, we’re buying stocks.
We suggest buying in a measured way. There is no need to jump in front of this train wreck, but with bargains starting to appear, now is the time to practice the valuable art of buying from fearful investors.
At this stage you should be honing in on companies that you want to hold for the long term.
Companies with competitive advantages, strong return on equity, low debt and good cash flow. Woolworths Ltd. (ASX: WOW), CSL Ltd. (ASX: CSL) and Coca-Cola Amatil Limited (ASX: CCL) are near the top of our buy list.
If this crash continues then those seeking higher returns – with commensurate risk - may consider buying a diversified selection of speculative companies, as their rebounds will be stronger. It’s ironic that buying the worst companies at market nadirs provides stronger returns than buying the best companies.
Keep that in mind and for now, keep some power dry. But most of all, keep calm. This too will pass.
Bruce Jackson is The Motley Fool's Managing Director. He has an interest in Woolworths shares. The Motley Fool's purpose is to educate, amuse and enrich investors. BusinessDay readers can click here to request a new free Motley Fool report titled 2 Safe Ways To Play The Commodities Boom.